Preparing for the Next Financial Crisis

Notions 7

Carlstrom and Fuerst, 1997). This meaning ts better into general equi-

librium approaches (Goodhart et al., 2006). Along those lines, Calomiris

(1995) draws a distinction between “nancial shocks”, dened as disruptions

of the real economy which originate from nancial markets and are more

likely to take place in periods of rapid nancial innovation, and “nan-

cial propagation”, which refers to the way contracts, markets, and nancial

intermediaries can aggravate shocks which take place elsewhere. He iden-

ties four nancial propagators. The rst one is the cash ow constraint,

which reects the fact that because of agency and information costs, internal

funds are cheaper than external funds. This increases the sensitivity of  ...